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The Prime Minister changes direction on social care. But will the cap fit?

Big election announcements on social care have a habit of coming back to bite you. As we pointed out in our reaction to the Conservative manifesto last week, proposals floated at the end of the last Labour government’s term for an estate tax were proclaimed a ‘death tax’ by the opposition. That tag has hamstrung progress since. And so it continues: the Conservatives’ decision to drop plans for a cap on total lifetime care costs in their manifesto has dominated the headlines and been labelled a ‘dementia tax’. The Prime Minister has now ‘clarified’ that there will in fact be a cap after all.

Putting the politics of all this to one side, what does this ‘update’ to the social care plans set out in the Conservative manifesto mean in design and funding terms? This is hard to answer because there is little detail as yet on how the cap will work – or what level it will be set at. But we can sketch out in broad terms what the policy might look like and what it might mean for individual and government spending on care.

What is the cap and why is it needed?

The idea for a cap on care costs originates from Andrew Dilnot’s commission on care funding, which back in 2011 proposed (along with a higher means test) an upper limit on the amount an individual would pay for social care over their lifetime. He argued that this was needed to prevent truly huge bills for a small but not insignificant minority unlucky enough to have high care needs for a long period, but lucky enough to have the assets to fund these. The commission estimated that one-in-ten people aged 65 would have future care costs (either paid out of their own pocket or covered by the state) topping £100,000. With private insurance markets not capable of protecting against this long-term risk, wider social insurance in the form of a cap was needed.

The previous government agreed, legislating for a cap on total lifetime care costs of £72,000 in the 2014 Care Act. However, the implementation of this cap was delayed until 2020 after the 2015 election, and appeared to have been ditched altogether in last week’s Conservative manifesto.

Following yesterday’s ‘clarification’ it now seems that there will be a cap after all if the Conservatives return to power. But there is still no detail on its level, timing, or how it will interact with the other social care elements of the manifesto package. For the purposes of illustration, in what follows we assume a cap of £100,000 on top of what was announced last week (which is detailed here), in a ‘steady state’ scenario (i.e. with no changes to the price of care or people’s levels of wealth).

What does it mean for individuals’ care costs?

Put simply, this new change will reduce both the total care bills for individuals with high care needs and relatively high wealth, and the share of their assets they’ll use to pay for their care.

First, a bit of background on the assets of the older population. The chart below shows that more than six-in-ten have assets above £100,000, and the vast majority of these assets are in their houses.

Considering the policies announced in the manifesto last week – simultaneously increasing the means test to £100,000 (from £23,250) and bringing housing wealth into play for domiciliary care – this tells us that a majority of households would still face a bill of some sort should they need care (assuming they also exceed eligibility tests based on income). And because few have financial wealth above £23,250 but low housing wealth, there are likely to be a greater number paying more than less (assuming most people receive at least some care in their own home) compared to the current system. Those receiving care in a residential setting are either unaffected or significant winners from the package.

Depending on the level a cap is set at, those on the right-hand side of this chart (with wealth exceeding the cap plus the means test) would be beneficiaries from yesterday’s clarification – they now have the reassurance that their risk of very high care costs will be protected.

The next two charts show how various policy iterations affect an individual’s total spend on care, and the share of assets used up for this purpose. We model a scenario in which total lifetime care costs are £150,000, split 3:2 between residential and domiciliary care.

Focusing first on the manifesto proposals from last week, the higher means test has reduced both the lifetime care bill and the share of assets depleted for someone with these high care needs but low-to-moderate wealth. Someone with a £120,000 home has gone from a bill of £90,000 in the current system to a bill of £20,000. Before they’d have lost 75 per cent of their assets. That’s now fallen to 17 per cent.

But the inclusion of housing in the domiciliary means test means people with more wealth lose out. Someone with £300,000 in their home has gone from a bill of £90,000 (just the residential care portion of their costs) to footing the whole £150,000 bill themselves (with asset depletion increasing from 30 per cent to 50 per cent).

The overall impact of last week’s proposals on people with combined residential and home-based care needs is to mitigate the worst excesses of the current system for those with low wealth and needing residential care, but increase both costs and asset depletion for those with moderate-to-high wealth.

Adding an illustrative £100,000 cap reduces costs for those with more than £200,000 in assets, by up to £50,000 in this case study. For our owner of a £300,000 house, it reduces asset depletion from 50 per cent to 33 per cent. For those with higher care costs than in this example, both spend and asset depletion will be much further reduced.

What does it mean for the government?

The medium- and long-term public finances impact of the introduction of a cap is more difficult to estimate. Andrew Dilnot has previously suggested that the legislated-for cap of £72,000 would cost around £2 billion. However the interaction with last week’s announcements makes things more complicated. A higher means test will reduce (more expensive) residential care spending for some but the inclusion of housing in the domiciliary test pushes in the other direction and should increase aggregate individual care spending. It’s not certain, but there’s a good chance it will be more costly for a future Conservative government to add a cap of a given level on top of the manifesto commitments, relative to adding it to the current system.

Briefing yesterday suggested that the cap will be funded not from general taxation but from the new means test and another key manifesto pledge – the decision to remove Winter Fuel Payments for all but the poorest pensioners. With the total Winter Fuel Payment bill currently standing at £2 billion, there’s certainly some cash to be had here, although the delivery challenge of means-testing payments will be significant. And to the extent that yesterday’s decision was a U-turn and not always part of the plans set out in the manifesto, there’s the whiff of money being spent twice here.

What’s clear is that nothing’s really clear yet – and should the Conservatives form a government next month the hard work of making the sums add up is yet to come.

So the cap fits – but we still don’t know the price tag, or who pays for it. The politics of U-turns are a mess, but the change (or clarification) in yesterday’s announcement is the right one. Protecting people from excessive financial risks that markets can’t manage to insure against is, after all, one of government’s primary functions.

More broadly, the new package now includes an injection of cash from older people’s homes and Winter Fuel Payments into a care system badly needing it; a higher floor on individual spending protecting some of the poorest pensioners; and a ceiling on spending protecting the unlucky wealthy needing a lot of social care. The ‘death charge’ is still in place, and will remain unpopular for many people, but reinstating the cap means we now have a more balanced package, as we called for last week.

Social care funding normally gets left in the ‘too difficult’ box, but at last both main parties seem to have packages in place to address it. The shift in the debate is welcome, however uncomfortable it may have left some recently.